CHAPTER INTRODUCTION

SECTION 1
Competition and Market
Structures
SECTION 2 Market Failures
CHAPTER SUMMARY
CHAPTER ASSESSMENT

Click a hyperlink to go to the corresponding section.

Press the ESC key at any time to exit the presentation.
2
 Economics and You
Why are some products available at
competitive prices? Why are other
products priced higher? In Chapter 7, you
will learn about the various effects
competition and market structures have
on the prices you pay.

Click the Speaker button to

listen to Economics and You.

3
 Chapter Objectives
Section 1: Competition and Market
Structures
• Explain the characteristics of perfect
competition. 
• Understand the nature of monopolistic
competition. 
• Describe the behavior and characteristics
of the oligopolist. 
• Identify several types of monopolies.

Click the mouse button or press the Space Bar

4 to display the information.
 Chapter Objectives
Section 2: Market Failures
• Discuss the problems caused by
inadequate competition. 
• Understand the importance of having
adequate information. 
• Describe the nature of resource
immobility. 
• Explain the nature of positive and
negative externalities.

Click the mouse button or press the Space Bar

5 to display the information.
 Introduction
• When Adam Smith published An Inquiry
into the Nature and Causes of the Wealth
of Nations in 1776, the average factory was
small, and business was competitive. 
• Laissez-faire, the philosophy that
government should not interfere with
commerce or trade, dominated
Smith’s writing. 
• “Laissez-faire” is a French term that means
“allow them to do.”

Click the mouse button or press the Space Bar

6 to display the information.
 Introduction (cont.)
• Today, economists classify markets
according to conditions that prevail
in them. 
• They ask questions such as: 
– How many buyers and suppliers are there? 
– How large are they? 
– Does either have any influence over price? 
– How much competition exists between firms? 
– What kind of product is involved–is everyone
trading the exact same product, or are they
simply similar? 
– Is it easy or difficult for new firms to enter the
market?
Click the mouse button or press the Space Bar
7 to display the information.
 Introduction (cont.)
• The answers to these questions help
determine market structure, or the nature
and degree of competition among firms
operating in the same industry. 
• Economists group industries into Four
different market structures:
• Perfect competition
• Monopolistic competition
• Oligopoly
• Monopoly.

Click the mouse button or press the Space Bar

8 to display the information.
 Market Structures

https://www.youtube.com/watch?v=9Hxy-
TuX9fs

9
 Perfect Competition
• Perfect competition is characterized by
a large number of well-informed
independent buyers and sellers who
exchange identical products. 
• Example of Perfect Competition:
Consider a farmers market where each
vendor sells the same type of jam.
There is little differentiation between each
of their products, as they use the same
recipe, and they each sell them at an
equal price.

Click the mouse button or press the Space Bar

10 to display the information.
 Five conditions characterize perfectly competitive markets:

• The first condition is that there are a large

number of buyers and sellers. 
• The second condition is that buyers and
sellers deal in identical products. 
• The third condition is that each buyer and
seller acts independently. 
• The fourth condition is that buyers and
sellers are reasonably well-informed about
products and prices. 
• The fifth condition is that buyers and sellers
are free to enter into, conduct, or get out of
business.

Click the mouse button or press the Space Bar

11 to display the information.
 Perfect Competition and
Profit Maximization
• In a perfectly competitive market, supply
and demand set the equilibrium price at
which the demand and supply curve
intersect each other. This point is known
as equilibrium point as well as the price is
known as equilibrium price

Click the mouse button or press the Space Bar

12 to display the information.
 Perfect Competition and
Profit Maximization (cont.)
• For example, in the
relationship Figure 7.1 A
Perfect Competition: Market Price
between an and Profit Maximization
individual firm and
the entire industry
under perfect
competition, the
market forces of
supply and demand
set the equilibrium
price at $15.

Click the mouse button or press the Space Bar

13 to display the information.
 A Theoretical Situation

• Although perfect competition is rare, it is

important because economists use it to
evaluate other market structures. 
• Imperfect competition is the name
given to a market structure that lacks
one or more of the conditions of perfect
competition. 
• This classification has three categories–
monopolistic competition, oligopoly,
and monopoly.

Click the mouse button or press the Space Bar

14 to display the information.
 Monopolistic Competition
• Monopolistic competition is the market
structure that has all the conditions of
perfect competition except for identical
products. 
• By making its product a little different, the
monopolistic competitor tries to attract more
customers and monopolize a small portion
of the market.
• Examples of Monopolistic competition:
Restaurants, hair salons, household
items, and clothing

Click the mouse button or press the Space Bar

15 to display the information.
 Product Differentiation
• In contrast to perfect competition,
monopolistic competition utilizes
product differentiation–real or imagined
differences between competing products
in the same industry. 
• Sometimes differences between products
are real. 
– For example, some brands of athletic footwear
have special shock-absorbing soles. 
– Others have certain construction materials to
reduce weight.

Click the mouse button or press the Space Bar

16 to display the information.
 Nonprice Competition
• Monopolistic competitors want to make
consumers aware of product differences. 

• They rely on Nonprice competition–the

use of advertising, giveaways, or other
promotional campaigns to convince buyers
that the product is somehow better than
another brand–often takes the place of
price competition. 
• Therefore, monopolistic competitors
usually advertise or promote heavily to
make their products seem different from
everyone else’s.
Click the mouse button or press the Space Bar
17 to display the information.
 Monopolistic Competition and
Profit Maximization
• Under monopolistic competition, similar
products generally sell within a narrow price
range. 
• The profit maximization behavior of the
monopolistic competitor is no different from
that of other firms. 
• The monopolistic competitor can enter the
market easily. 

Click the mouse button or press the Space Bar

18 to display the information.
 Monopolistic Competition and
Profit Maximization (cont.)
• Monopolistic competitors expand
production until marginal cost equals
marginal revenue (MC = MR).
• Profit is maximized at the level of output
where the cost of producing an
additional unit of output (MC) equals the
revenue that would be received from
that additional unit of output (MR).

19
 Oligopoly
• Oligopoly is a market structure in which very
few sellers dominate the industry.
• In an oligopoly, very few sellers dominate the
industry.
• Examples of oligopoly :fast-food industry, the
soft drink industry, and domestic airlines
• Oligopolists tend to act together—if one
company reduces prices or offers a promotion,
others in the industry match the price or
promotion almost immediately to avoid losing
customers.
• Oligopolists compete on a nonprice basis by
introducing new or different features.

Click the mouse button or press the Space Bar

20 to display the information.
 Interdependent Behavior
• Because oligopolists are so large,
whenever one firm acts the other firms
usually follow. 
• Each oligopolist knows that the other firms
in the industry have considerable power
and influence. 
• Sometimes the interdependent behavior
takes the form of collusion, a formal
agreement to set prices or to otherwise
behave in a cooperative manner.

Click the mouse button or press the Space Bar

21 to display the information.
 • Collusion is an illegal agreement among
oligopolists to fix prices or otherwise
behave in a cooperative manner for their
own benefit.
• Ex: Several high end watch companies
agree to restrict their output into the market
in order to keep prices high.
• Collusion between firms is harmful to
consumers. This is because firms collude
to raise prices

22
 Interdependent Behavior (cont.)
• One form of collusion is price-fixing–
agreeing to charge the same or similar
prices for a product. 
• In almost every case these prices are
higher than those determined under
competition.

Click the mouse button or press the Space Bar

23 to display the information.
 Oligopoly and Profit Maximization
• The oligopolist, like any other firm,
maximizes its profits when it finds the
quantity of output where its marginal cost
is equal to its marginal revenue.
• Why prices are usually higher in an
oligopoly than they would be in perfect
competition?
Because the firms often do not compete
on price but rather choose to compete
on alternative parameters such as
product quality.

Click the mouse button or press the Space Bar

24 to display the information.
 Monopoly
• At the opposite end of the spectrum from
perfect competition is the monopoly. 
• A monopoly is a market structure with
only one seller of a particular product. 
• This situation–like that of perfect
competition–is an extreme case. 
• Consequently, when people talk about
monopolies, they usually mean near
monopolies. 

Click the mouse button or press the Space Bar

25 to display the information.
 Types of Monopolies
• Sometimes the nature of a good or
service dictates that society would be
served best by a monopoly. 
• One such case is a natural monopoly–a
market situation where the costs of
production are minimized by having a
single firm produce the product. 
• Natural monopolies can provide services
more cheaply as monopolies than could
several competing firms.

Click the mouse button or press the Space Bar

26 to display the information.
 Types of Monopolies (cont.)

• To avoid these problems, the government

often gives a public utility company a
franchise, the exclusive right to do
business in a certain area without
competition. 

• The justification for the natural monopoly

is that a larger firm can often use its
personnel, equipment, and plant more
efficiently

Click the mouse button or press the Space Bar

27 to display the information.
 Types of Monopolies (cont.)
• This results in economies of scale, a
situation where the average costs per
unit of output decrease with the increase
in the scale or magnitude of the output
being produced by a firm. 
• Sometimes a business has a monopoly
because of its location. 
• A drugstore operating in a town that is too
small to support two or more such
businesses becomes a geographic
monopoly, a monopoly based on the
absence of other sellers in a certain
geographic area.
Click the mouse button or press the Space Bar
28 to display the information.
 Types of Monopolies (cont.)
• A technological monopoly is a
monopoly that is based on ownership or
control of a manufacturing method,
process, or other scientific advance. 
• The government may grant a patent–an
exclusive right to manufacture, use, or sell
any new and useful invention for a
specific period. 
• Art and literary works are protected
through a copyright, the exclusive right of
authors or artists to publish, sell, or
reproduce their work for their lifetime plus
50 years.
Click the mouse button or press the Space Bar
29 to display the information.
 Types of Monopolies (cont.)
• Still another kind of monopoly is the
government monopoly–a monopoly the
government owns and operates. 
• In most cases they involve products or
services that private industry cannot
adequately provide. 

Click the mouse button or press the Space Bar

30 to display the information.
 Monopoly and Profit Maximization
• Monopolies maximize profits the same
way other firms do: they equate marginal
cost with marginal revenue to find the
profit-maximizing quantity of output. 
• First, the monopolist is very much larger
than the perfect competitor. 
• Second, this large size, along with the
lack of meaningful competition, allows
the monopolist to behave as a price
maker—as opposed to the perfect
competitor who is a price taker.
• Because there are no competing firms in the industry,
there is no equilibrium price facing the monopolist. 

Click the mouse button or press the Space Bar

31 to display the information.
1. No of Sellers

2. Pricing Power

3. Barriers to
Entry/Exit
 • Identify the market structure in the
following examples:

Healthy and Hearty Soups produces a variety of soups. There

is considerable competition in the soup market. However,
healthy and hearty soups have spent several million dollars
on an advertising campaign to convince consumers
that their soups are healthier than all other soups. Because
of this advertising, healthy and hearty soups charges higher
price than other soups on the market.

Market structure: monopolistic competition.

33
 Bill's Salmon Supplier sells fresh salmon to local seafood
restaurants. Every morning Bill sails out to sea to catch
salmon, and each afternoon he returns to sell his catch to
local restaurants. There are hundreds of other fishers
catching and selling salmon. Because the salmon Bill
catches is just like the salmon caught by the other fishers,
he can't raise his price.

Market structure: perfect competition because

the products are all the same.

34
 County Cable supplies cable access to all local residents.
It was a very expensive business to start. The
entrepreneurs who started County Cable had to provide
underground wire for the entire community. Other
companies tried to compete, but the start up costs were
simply too high.

Market structure: Monopoly

35
 Perfect Picture Cameras is a national camera company. It
competes with a couple of other national camera companies. In
order to gain an upper hand in the market, Perfect Picture
Cameras has differentiated its camera by including an
automatic focus and flash. Perfect Picture Cameras has the
ability to raise its prices because of its unique features.
However, federal regulations are always watching the company
to ensure that no collusion occurs with other camera
companies.

Market structure: oligopoly because collusion is

suspected.

36
 Section Assessment (cont.)
List the five characteristics of perfect
competition.

The five characteristics of perfect

competition are: large number of
buyers and sellers, deal in identical
products, act independently, are well
informed, and ease of entry into
market.

Click the mouse button or press the Space Bar

37 to display the answer.
 Section Assessment (cont.)
Describe monopolistic competition.

In monopolistic competition there are

many competitors, a similar item or
service, and entry into the market is
easy.

Click the mouse button or press the Space Bar

38 to display the answer.
 Section Assessment (cont.)
Explain why the actions of one
oligopolist affect others in the same
industry.

Others must follow to maintain

market share.

Click the mouse button or press the Space Bar

39 to display the answer.
 Section Assessment (cont.)
Identify the types of monopolies.

There are natural, geographic,

technological, and government
monopolies.

Click the mouse button or press the Space Bar

40 to display the answer.
 Section Assessment (cont.)
Synthesizing Information Provide at
least two examples of oligopolies

Some possible answers include the

fast-food industry, the soft drink
industry, and domestic airlines.

Click the mouse button or press the Space Bar

41 to display the answer.
 Lesson 2

42
 Introduction •https://www.youtube.com/watch?
v=13JOGWzY8kE&t=490s
How do markets fail?
• A competitive free enterprise economy
works best when four conditions are
met. 
1. Adequate competition must exist in all markets.

2. Buyers and sellers must be reasonably well-
informed. 
3. Resources must be free to move from one
industry to another. 
4. Finally, prices must reasonably reflect the costs
of production, including the rewards to
entrepreneurs.

Click the mouse button or press the Space Bar

43 to display the information.
 Introduction (cont.)
• Accordingly, a market failure can occur
when any of these four conditions are
significantly altered. 
The most common market failures involve
cases of:
1.Inadequate competition, inadequate
information.
2.Resource immobility
3.External economies
4.Public goods.

Click the mouse button or press the Space Bar

44 to display the information.
 Inefficient Resource Allocation
Inadequate Competition:
•Decreases in competition because of mergers and
acquisitions can lead to several consequences that
create market failures.
•Inefficient resource allocation often results when
there’s no incentive to use resources carefully.
•Reduced output is one way that a monopoly can
retain high prices by limiting supply.
•A large business can exert its economic power
over politics.
•Market failures on the demand side are harder to
correct than failures on the supply side.
Click the mouse button or press the Space Bar
45 to display the information.
 Inadequate Information
Inadequate Information:
•Consumers, businesspeople, and
government officials must be able to obtain
market conditions easily and quickly.
•If they cannot, it is an example of market
failure.

Click the mouse button or press the Space Bar

46 to display the information.
 Resource Immobility
• One of the more difficult problems in any
economy is that of resource immobility. 
• Resource immobility occurs when land,
capital, labor, and entrepreneurs stay
within a market where returns are slow
and sometimes remain unemployed.
• When resources will not or cannot move
to a better market, the existing market
does not always function efficiently.
• What happens, for example, when a large auto assembly
plant, steel mill, or mine closes, leaving hundreds of
workers without employment? 

Click the mouse button or press the Space Bar

47 to display the information.
 Externalities
• Externalities are indirect cost or benefit to an
uninvolved third party that either benefit or harm a third
party.
• Negative externalities are harm, cost, or inconvenience
suffered by a third party.
• Ex: The classic case of a negative externality is the
noise and inconvenience some people suffer when an
airport expands.
• Positive externalities are benefits received by someone
who had nothing to do with the activity that created the
benefit.
• Ex: Vaccincations, and For example, street lights
provide drivers and pedestrians with enhanced visibility
during the night. Both benefit without a direct cost
being imposed on them
Click the mouse button or press the Space Bar
48 to display the information.
 Public Goods
• Another form of market failure shows up in
the need for public goods. 
• Public goods are products or services that
is made available to all members of a
society.
• Examples of public goods are uncrowded
highways, police and fire protection.
• Since public goods are made available to
all people–regardless of whether each
person individually pays for them–it is
possible for some members of society to
use the good despite refusing to pay for it

49
 Public Goods (cont.)
• The market, however, when left to itself,
does not supply these items–or only
supplies them inadequately. 
• This is because a market economy
produces only those items that can be
withheld if people refuse to pay for them. 
• Because it is so difficult to get everyone to
pay for their fair share of a public good,
private markets cannot efficiently produce
them and will therefore produce other
things.

Click the mouse button or press the Space Bar

50 to display the information.
 Which of the four conditions of a
competitive free enterprise economy does
the need for public goods fail to meet?
•Reasonable prices
Describe the similarities and differences
between positive and negative
externalities?
•Both affect a third party.
•Positive: benefits;
•negative: harms, costs, and inconveniences

51
 Section Assessment (cont.)
Define “adequate competition” in your
own words and explain why markets
need adequate competition.

Adequate competition keeps one

competitor from becoming too
powerful.

Click the mouse button or press the Space Bar

52 to display the answer.
 Section Assessment (cont.)
Explain the importance of having
adequate information.

Without it, producers and consumers

are unaware of products or services
that would benefit them.

Click the mouse button or press the Space Bar

53 to display the answer.
 Section Assessment (cont.)
Explain why resources are not always
mobile and willing to move.

In the example of labor, people may

be unable to sell homes, or are not
willing to leave.

Click the mouse button or press the Space Bar

54 to display the answer.
 Section Assessment (cont.)
Describe the similarities and
differences between positive and
negative externalities.

Both affect a third party. Positive:

benefits; negative: harms, costs, and
inconveniences

Click the mouse button or press the Space Bar

55 to display the answer.
 Section Assessment (cont.)
Understanding Cause and Effect
Identify one possible positive externality
and one possible negative externality
from the closing of a military base.
Possible answers: positive
externality–bad traffic caused by the
base may improve after the closing;
negative externality–businesses near
base might lose customers.

Click the mouse button or press the Space Bar

56 to display the answer.
Click the mouse button to return to the Contents slide.
 Reviewing the Facts

Describe the five characteristics of

perfect competition.

large number of buyers/sellers;

buyers/sellers deal in identical
products; buyers/sellers act
independently; buyers/sellers are well
informed; ease of entry into market

Click the mouse button or press the Space Bar

58 to display the answer.
 Reviewing the Facts (cont.)

Explain the main characteristics of

the monopolistic competitor.

competitor uses product

differentiation, nonprice competition,
price competition

Click the mouse button or press the Space Bar

59 to display the answer.
 Reviewing the Facts (cont.)

Contrast the oligopolist and the

perfect competitor.

oligopolist: few large competitors

dealing in differentiated products may
take actions that can change output,
sales, and prices in the industry as a
whole; perfect competitor: one of
many producers dealing in identical
products, and the actions he or she
may take have no effect on prices
Click the mouse button or press the Space Bar
60 to display the answer.
 Reviewing the Facts (cont.)

Describe the four types of

monopolies.

natural: costs are minimized by having

single producer; geographic: business
has monopoly because of its
geographic location; technological: firm
or individual has discovered new
manufacturing technique or has created
something new; government:
government owns and operates the
business
Click the mouse button or press the Space Bar
61 to display the answer.
 Reviewing the Facts (cont.)

Explain what happens when markets

do not have enough competition.

Productive resources will not be

allocated efficiently; prices may rise
and output decrease.

Click the mouse button or press the Space Bar

62 to display the answer.
 Reviewing the Facts (cont.)

Provide two examples of inadequate

information in a market.

a lack of information about wages for

the same job in different industries, or
lack of information about returns on
investments

Click the mouse button or press the Space Bar

63 to display the answer.
 Reviewing the Facts (cont.)

Explain what is meant by resource

immobility.

Resources are unable or unwilling to

move to markets where returns are
highest.

Click the mouse button or press the Space Bar

64 to display the answer.
 Reviewing the Facts (cont.)

Explain what is meant by positive

and negative externalities.

positive: economic action benefits

uninvolved third party; negative:
harms an uninvolved third party

Click the mouse button or press the Space Bar

65 to display the answer.
 Reviewing the Facts (cont.)

Account for the reluctance of the

private sector to produce public
goods.

private sector only willing to produce

items that can be withheld if people
unwilling to pay

Click the mouse button or press the Space Bar

66 to display the answer.
 Thinking Critically (cont.)

Summarizing Information Why do

private producers fail to provide
public goods?

It is difficult to get everyone to pay for

their share of a public good.

Click the mouse button or press the Space Bar

67 to display the answer.
Click the mouse button to return to the Contents slide.
Continued on next slide.
Continued on next slide.
 Economics and You
Video 8: Competition and
Monopolies

How is a monopoly different than an

oligopoly?

A monopoly exists when only one

product or service exists; an
oligopoly exists when only a few
producers compete in a market.
Side 1
Disc 1
Chapter 8

Click the mouse button or press the Space Bar to display the
answer.
Click the mouse button to return to the Contents slide.